LinkedIn: Capstone Launches With Sell Rating, $45 Target

Meeks yesterday picked up coverage of the social networking site with a Sell rating and a $45 target price - that's less than half the current price.

"There is froth in the stock price of LinkedIn and other social media names," he writes. "We can't get here (over $90 per share) from there or from where we see LinkedIn going even under the most optimistic scenario."

Meeks sees multiple issues with the stock and the company:

He notes that the company's fastest growth segment - Hiring Solutions - relies on field reps. "Therefore, this business driver may not scale as investors hope for," he writes. "Also to date the company has spent relatively heavily on capital expenditures. If this doesn't slow, LinkedIn many not generate the cash that analysts expect." In the March quarter, Hiring Solutions accounted for 49% of sales.

Meeks sees drawbacks in the company's focus on members rather than investors: "While solely focusing on customers instead of financial results may be an admirable promise, it can create angst for shareholders hungry for short-term and consistent financial results," he writes. "Amazon.com is probably the only major Internet company - and that's what investors expect LinkedIn to be - that has bridged this gap since Internet Bubble 1.0."

Not least, he sees some corporate governance issues: In particular, he notes that the company "has and will continue to be run for its controlling chairman and three major venture capital partners," who together control about 55 million of 99 million shares outstanding after the offering. He also has concerns about significant selling holders in the IPO, including management. And he points to a history of "accounting miscues," in particular a 2008 financial restatement of results for the two previous years. He's also unhappy with Greylock Partners' dominance of management and the board. He sees a warning flag in the fact that a good portion of the IPO proceeds were targeted at cashing out earlier investors. And he is not happy with the company's use of adjusted EBITDA to track results.

Meeks contends the EBITDA issue is "the doozy."

"What happened to GAAP?" he asks. "We'd even reluctantly settle for pro forma earnings. In this case, LinkedIn adjusts GAAP net income for taxes, depreciation and amortization, net other income and stock-based compensation. Management takes this seriously because adjusted EBITDA is an important metric used to calculate the senior team's non-salary riches." He notes that in the March quarter, the company had $13.3 million of adjusted EBITDA, but just $2.1 million in GAAP net income.